HUD: 750,000 borrowers helped with Obama refi plan

Banks reach out to ‘hundreds of thousands’ on principal reductions

By

RonaldD. Orol

WASHINGTON (MarketWatch) — Even as roughly 750,000 borrowers who have no equity in their homes have benefited from an expanded White House refinancing program, more needs to be done, a top housing regulator said Tuesday.

At issue is a program known as the Home Affordable Refinance Program, which was expanded in December and seeks to help borrowers refinance to current low interest rates, as long as their mortgage is backed by Fannie Mae and Freddie Mac, the government-controlled housing giants.

Shaun Donovan, secretary for the U.S. Housing and Urban Development Department, told lawmakers at a Senate Banking Committee hearing on Tuesday that there are large barriers to borrowers participating in the program, and that he backed legislation introduced by Sen. Robert Menendez, Democrat of New Jersey, to seek to reduce costs even more for borrowers and lenders — including a provision that would eliminate appraisal costs for borrowers in all markets.

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Donovan’s comments came after reports that Bank of America Corp. is offering mortgage-principal reductions to as many as 200,000 borrowers. “There are thousands of families that have already benefited and hundreds of thousands more that are now getting [such] letters, not just from Bank of America,” Donovan said.

Five major banks including B. of A.
BAC, -0.84%
are mailing letters offering to cut mortgage debt for hundreds of thousands of borrowers, as part of a $25 billion foreclosure-abuse settlement with state attorneys general, according to the HUD secretary. The other banks involved in the settlement are Ally Financial Inc., Citigroup Inc.
C, -0.23%
J.P. Morgan Chase & Co.
JPM, -0.62%
and Wells Fargo & Co.
WFC, -0.68%

Before the program was expanded, about 894,000 borrowers were able to refinance their mortgages through HARP. However, millions more borrowers could be eligible to refinance to record-low interest rates (a 30-year loan carried an interest rate of 3.84% last week) if HARP is expanded. Roughly 11 million U.S. residential properties at the end of the fourth quarter of 2011 were “under water,” with borrowers owing more on their mortgages than their homes were worth.

The legislation also seeks to allow certain higher-equity Fannie and Freddie borrowers to participate, noting that many people who do not owe more than their mortgage is worth are blocked from refinancing because they have other debts or second mortgages.

Finally, Donovan pushed another provision in the bill that would also seek to reduce additional barriers to competition by directing Fannie and Freddie to lower litigation risk for lenders who refinance loans they did not originate.

The existing regulations only allow homeowners to participate if they are current on their loans, and if their loans were sold to Fannie and Freddie by May 31, 2009. The legislation would extend the program another year for loans sold to Fannie and Freddie through May 31, 2010. Read about the Obama administration's expanded HARP program.

“One of the key barriers we have is that [mortgage] servicers who don’t have that loan or service that loan are being discouraged from refinancing that loan,” according to Donovan. “There are a number of changes we can make there, underwriting changes there to lower cost of refinancing.”

Nevertheless, it is unclear whether the Menendez reforms have a chance. Jaret Seiberg, analyst at Guggenheim Securities LLC in Washington, said his odds for the legislation passing are 20% “as we believe Republicans do not want to give Democrats a victory on this issue.” He added that it was “political theater” designed to show troubled borrowers that Democrats are fighting to provide them with relief.

However, Democrats argue that the provisions in the Menendez legislation could be implemented by the Federal Housing Finance Agency, the regulator that oversees government-seized Fannie and Freddie, without an act of Congress. An FHFA spokeswoman did not return requests for comment. Democrats contend that the legislation could drive FHFA and its chief, Ed DeMarco to act. Read about the regulator who could block mortgage-refi plan.

A number of Democratic lawmakers cite comments made by Columbia University Prof. Christopher Mayer, who estimated that as many as 11.6 million new refinancings could take place based on the provisions in the Menendez legislation. He said that it could also hike profits to Fannie and Freddie by preventing about 400,000 foreclosures.

Republicans on the committee said they were willing to work with Democrats to create bipartisan legislation, but they raised concerns indicating that they may try to tackle much-larger initiatives along with the Menendez legislation — all of which could bog down the bill and limit or delay its chance of passage.

Sen. Richard Shelby, the Republican from Alabama and top Republican on the panel, said that Democrats have not taken larger steps to fix the housing market, such as reforming Fannie and Freddie, which have cost taxpayers $183 billion as of Dec. 14.

“While taxpayers have spent almost $190 billion bailing out [Fannie and Freddie], the only work product we have received from the administration is a brief discussion piece that lists three policy ‘options,’ but does not make any recommendations,” he remarked.

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